1 
The facts

2 The first appellants are an off-shore bank whose headquarters are in Brussels, Belgium. The respondents were a non-exempt private company dealing in and manufacturing paper products like corrugated and offset boxes using imported raw materials. They are presently in liquidation following a winding-up order made on 24 July 1987. This claim, brought by the respondents` liquidators, arose out of a loan agreement between the first appellants and the respondents which was negotiated in March 1985. The respondents` chairman, managing director and majority shareholder was one Djamzu Papan (`Papan`), who was also the chairman, managing director and majority shareholder of an Indonesian group of companies, the Putera Group. This claim involves two other companies from that group, PT Putera Adil Utama (`PAU`) and PT Kertas Berkasi Teguh (`KBT`).

3 On 28 May 1984, a US$1m credit facility for letter of credit and trust receipts was granted by the first appellants to PAU. This was secured by the personal guarantees of Papan and his wife. By 31 December 1984, however, the drawdown had reached US$954,488.18 and, shortly thereafter, had exceeded US$1m and PAU had defaulted in repayments. This caused the first appellants much concern.

4 At the same time, the respondents wished to obtain credit facilities from the first appellants as they were experiencing difficulties in servicing the interest payments on facilities granted to them by The Development Bank of Singapore Ltd (`DBS`). The first appellants were not minded to oblige them until the problems with PAU had been settled. In February 1985, the first appellants` credit manager, J Kestemont (`Kestemont`), and accounts officer, Seah Chin Hong (`Seah`), met Papan and Chan Yoo Tuck, Putera`s financial consultant, over lunch at Shima Restaurant at Goodwood Hotel to discuss the situation. The lunch was unsuccessful in resolving the first appellants` dissatisfaction regarding the loan with PAU as Papan was content to do no more than offer his excuses. Around mid-March 1985, Kestemont and Seah visited Papan in Jakarta for further negotiations. According to Kestemont, the purpose of the visit was to attempt to obtain a better insight on the financial situation of the Putera Group and to obtain a solution for PAU`s outstanding trust receipts. Also present were Tjandra Bachtiar, financial director, Eka, director for planning and budget, and Chan Yoo Tuck.

5 In Jakarta, the parties agreed to a scheme whereby the first appellants were to furnish the respondents with US$2m credit, on the security of a second debenture and a second mortgage over the respondents` factory in Singapore and the guarantees of Papan and his wife, on the condition that US$1m would be used to discharge PAU`s debt to the appellants. To do this, the credit facilities were split into two tranches, each of US$1m. The first US$1m was to be a short-term loan facility which was then to be used to pay off PAU`s debt to the first appellants. The second tranche was to be a discounting facility which the respondents could utilize for their own benefit. The repayment of PAU`s debt to the respondents was part of another agreement involving KBT. The respondents were to purchase from KBT through PAU 6,667 metric tons of paper at S$600 per metric ton. They also agreed with KBT at the same time to pay a deposit of 50% of the total price by paying on KBT`s behalf or their `assigned accounts` to the first appellants a sum to settle KBT`s accounts or their assigned accounts with the first appellants. This `assigned account` was to be that of PAU, whose debt would therefore be discharged. Conveniently, there also happened to be a debt already outstanding owed by KBT to PAU, thus KBT`s supply of paper through PAU would help to offset this as well.

6 After the meeting in Jakarta, Kestemont and Seah proceeded to examine the creditworthiness of the respondents and to obtain clearance from their head office in Brussels. Approval was first given by two persons from the head office, Finet and De Vuyst, and this was ratified officially by the foreign credit subcommittee later on 24 June 1985. Between 15 to 21 March, Kestemont and Seah visited the respondents` factory in Jurong. There, they were attended to by Ong Seng Oh (`Ong`) and Stanley Koo (`Koo`). Ong was the respondents` financial controller and company secretary, and Koo was the general manager, marketing and operations.

7 The first appellants` letter of offer was sent to the respondents on 27 March 1985. The loan offered was in two tranches. The first US$1m was for short term advances, and/or opening letters of credit, and/or for refinancing trust receipts. The second US$1m was for bills discounting and the purchase of D/A and/or D/P bills of approved buyers. On 1 April 1985, the respondents accepted this offer by letter. At the same time, the respondents enclosed certified copies of their memorandum and articles of association, their certificate of incorporation, and the directors` resolution to borrow made at a meeting of the board of directors on 28 March 1985, together with a general agreement for commercial business signed by two directors, the signed personal guarantees of Papan and his wife, the account opening cards and the directors` resolution to open a current account signed by three directors. There was, in fact, no meeting of the board of directors on 28 March 1985, but a majority of the board signed a circular resolution pursuant to art 112 of the articles of association approving the loan, and all the directors except Papan signed another circular resolution authorizing Ong and Khoo `to specifically settle` US$1m on behalf of PAU and giving them authority to transact all dealings with the bank on behalf of the respondents. At trial, Papan and the directors admitted that the directors had been persuaded to sign the two circular resolutions by Papan.

8 On 10 April 1985, the respondents forwarded to the first appellants `a set of our contract with KBT dated 1 April 1985 regarding the supply of paper rolls to us for the year of 1985 and 1986` together with instructions to the first appellants to debit the respondents` account and credit PAU`s account with US$1m. However, the copy of the KBT agreement sent to the first appellants was signed only by the respondents and not by KBT. PAU was informed of and given a copy (again unsigned) of the agreement by a letter of 29 March 1985 signed by Ong and Koo.

9 Meanwhile consent for the debenture had been sought from and granted by DBS, the holders of the first debenture and mortgage over the respondents` factory. Subsequently, on 23 April 1985, a second debenture creating fixed and floating charges over the assets of the respondents, a second mortgage over the factory and forms 33 and 34 to secure the US$2m credit facilities were executed by Ong, as the financial controller and company secretary, and Ho Kiat Lim, as director, on behalf of the respondents in favour of the first appellants.

10 On 24 April 1985, the first appellants carried out the instructions of the respondents to debit the respondents` account with US$1m and to credit PAU`s account with the same. At the same time, the respondents started to use their additional discounting facilities. However, KBT and the respondents did not perform the agreement between them for the supply of paper through PAU. In consequence, the repayment of PAU`s debt to the first appellants was made by the respondents without any consideration.

11 The respondents were unable to pull out of their financial difficulties. On 31 October 1986, the second and third appellants were appointed receivers and managers by DBS over the property, assets and undertaking of the respondents charged to DBS. Subsequently, on 10 April 1987, the first appellants exercised their powers under the second debenture and appointed the second and third appellants as receivers and managers of the respondents. On the same day, the second and third appellants forwarded to the first appellants a cheque for S$2,723,466.34 to settle the respondent`s outstanding indebtedness. On 4 May 1987, the second and third appellants were discharged from their appointment as receivers and managers.

12 About two months later, on 24 July 1987 a winding-up order was made against the respondents on a petition presented by Banque Nationale de Paris. The liquidators appointed were Don M Ho and Jimmy Wee Aik Guan. On 21 July 1988, the liquidators brought this action for a declaration that the debenture was void. By this action it was alleged that the directors had executed the debenture without authority and in breach of their fiduciary duties, and that the first appellants had notice of that fact. Accordingly, it was alleged that the debenture was void as against the first appellants; thus the second and third appellants, whilst purporting to act as receivers and managers, had obtained possession of and wrongfully paid over S$2,723,466.34 to the first appellants, and S$4,010 to two others, totalling S$2,727,476.34.

13  Before the High Court

14 At first instance, counsel for the respondents rightly conceded that the taking of the US$2m facility from the first appellants was within the corporate powers of the company. The bone of contention which remained, as the learned judicial commissioner stated it, was whether the transaction was in excess of the directors` powers and the first appellants had notice of such abuse or excess of powers. On this, the learned judicial commissioner held that, first, the primary purpose of the facility was to discharge PAU`s debt and the KBT agreement was not genuine; secondly, the first appellants knew of this and had reason to believe that the KBT agreement was not genuine; and, thirdly, the directors` powers of borrowing were limited by arts 114 and 115 of the articles of association, and, therefore, the taking of the facility was in excess of the directors` powers and the first appellants had notice of such excess. Accordingly, she ordered that the first appellants reverse the entries made on 24 April 1985 and credit the respondents` account with US$1m and debit PAU`s account with the same figure. She ordered payment by the first appellants to the liquidators of the respondents of US$1m with interest calculated at 6% pa from 24 April 1985 until judgment. The second debenture was set aside, and the first appellants were held to be constructive trustees of all moneys received from the second and third appellants over and above US$1m.

15  Before the Court of Appeal

16 Lack of authority and notice

17 Before us, therefore, the discussion centred on the respondents` contention that the directors had lacked authority to agree to the loan and that, as the appellants received prior notice of this, the debenture was void as against them.

18 On the first issue of the ambit of the directors` authority, the learned judicial commissioner held that the directors lacked the relevant authority for the transaction owing to arts 114 and 115 of the respondents` articles of association. The two articles read as follows:

19 The learned judicial commissioner premised her finding on the italicized portions of the articles. It was her view that the transaction was not for the purposes of the company, temporary or otherwise, and was therefore made without authority.

20 Counsel for the appellants contended that the transaction was indeed for the purposes of the company. He pointed out that only half of the loan was used for the discharge of PAU`s debt, the other half was used to ease the respondents` own financial difficulties. As the two halves of the loan were not severable, the whole loan was proper. In our opinion, to allow this argument would be to allow directors to act to the detriment of the company whenever benefit could also be derived. This would constitute an inroad into their fiduciary duty to act in the best interests of the company at all times. In addition, it would allow circumvention of statutory provisions which prohibit certain loans in absence of the proper and necessary precautions, for instance s 163 of the Act.

21 Counsel for the appellants argued in the alternative that the ambit of the directors` authority was wider than that prescribed by arts 114 and 115. His basis was cl 12 of the Third Schedule to the Companies Act (Cap 50, 1990 Ed), specifically incorporated into the memorandum of association by cl 3(xlv) of the memorandum. Clause 12 gives the respondents power to undertake the repayment of loans of third parties. It reads:

22 In our judgment, counsel for the appellants has failed to distinguish between the question of corporate capacity or power and the wholly separate question of directors` authority. Corporate capacity, as defined by a company`s objects clauses, is that which a company can do. The directors` authority on the other hand, does not of necessity equate to the company`s. The articles of association can, and in the present case do, limit the directors` authority to a specific sphere, outside of which they cannot venture without the approval of shareholders.

23 We find support for our view in the case of Rolled Steel Products (Holdings) Ltd v British Steel Corp . In that case, R carried on the business of importing and selling steel. The director and majority shareholder was S, who also owned another company SSS. R borrowed money from SSS. SSS owed money to C, which was then renationalized and taken over by the British Steel Corporation (`BSC`). SSS was threatened with winding-up by the BSC. The following scheme was adopted to save SSS. C lent money to R to pay off its debt to SSS, who in turn used the money to pay off some of its debt to C. The balance of the sum owing to C was guaranteed by R. The net effect of these transactions was that R incurred liability to C in place of SSS (in the form of a debenture) and stood as guarantor for the balance of the debt SSS owed C. R brought an action claiming that the guarantee and debenture were void owing to lack of corporate capacity as well as lack of authority on the part of the directors. Its basis was that the loan was made for the purposes and benefit of S, and the directors were obliged by the memorandum of association to exercise their powers `as may seem expedient`. Slade LJ stated that the words `as may seem expedient` necessarily meant `as may seem expedient for the furtherance of the objects of the company`. However, this condition did not affect the company`s corporate capacity, it served as a limitation only upon the authority of the directors. The Court of Appeal, therefore, held that the transaction was not ultra vires. Nevertheless, the transaction was not in furtherance of the interests of the company and thus unauthorized. As C had notice of this, it was unable to enforce the guarantee and debenture.

24 In the present case, the respondents` corporate capacity is in fact wider than that of R`s in the Rolled Steel case.1 No condition was attached to cl 12. The directors` authority was demarcated, however, by the words `for the purposes of the company` in arts 114 and 115 of the articles of association. The learned judicial commissioner found that the gratuitous repayment of PAU`s debt was not `for the purposes of the company` and we are in agreement with her view. Papan, who persuaded the other directors to sign the circular resolutions, admitted at trial that he had no intention at any time to perform the agreement between KBT and the respondents. He testified that he merely wished to pay off PAU`s debt to obtain extra funds for the respondents from the first appellants and the repayment of PAU`s debt was to be made without consideration. In our considered opinion, the transaction was clearly one which the directors were not authorized to execute.

25 We think, therefore, that the crux of the appeal lay in the issue of whether the appellants had notice of the lack of authority.

26 It was said by counsel for the respondents that the appellants are deemed by law to have knowledge of the respondents` memorandum and articles of association: Ernest v Nicholls , Woodlands Development Sdn Bhd v Chartered Bank; PJTV & Densun (M) Sdn Bhd (third party) . He contended, therefore, that the first appellants had knowledge of arts 114 and 115 and because the loan was in breach of arts 114 and 115, the first appellants had notice of the breach of authority. In our view this argument lacks merit. The limitation expressed in arts 114 and 115 was not a specific one but a general instruction to the directors to borrow `for the purposes of the company`. Ostensibly, then, the transaction was within the directors` authority and this is that which the appellants are deemed to know; unless the first appellants had cognizance of the improper purpose, they were in fact protected by the articles.

27 In this context, the Rolled Steel case,1 set out at length earlier, is again pertinent. It will be recalled that the memorandum of association limited the directors` powers to situations `as may seem expedient`. This provision in itself was held to be insufficient to establish notice. Browne-Wilkinson LJ stated at p 305 of his judgment: `a third party is not put on notice by an express requirement that the power is only exercisable for the company`s purposes`. The Court of Appeal expressly reviewed and upheld the trial judge`s finding that the defendants had notice. Slade LJ explained at p 282:

28 At p 307, Browne-Wilkinson LJ explained that the court held the guarantee and debenture to be void owing to the fact that the plaintiffs were able to prove actual notice of the absence of authority:

29 But, as the judge and Slade LJ have demonstrated, British Steel Corporation had actual knowledge of facts which showed that the giving of the guarantee and the debenture was an abuse of powers by the directors of the plaintiff since the transaction was not even considered to be of benefit to the plaintiff.

30 Thus constructive knowledge of the memorandum and articles of association is insufficient. We must, as the Court of Appeal did in the Rolled Steel case,1 review the learned judicial commissioner`s finding that the first appellants had cognizance of Papan`s improper purpose.

31 The learned judicial commissioner`s reason for holding that the appellants had notice of the fact that the primary purpose of the loan was to discharge PAU`s debt was `because there was every reason to believe that the KBT agreement was not genuine`, and, in her view, the whole of the circumstances must have at least put the appellants on inquiry of `what can only be termed a highly unusual transaction whereby a Singapore company assumed liability for and discharged a debt of an Indonesian company`. Regrettably, and with respect, our view is to the contrary. We think that the transaction proposed by the first appellants resembled an ordinary business deal between related companies in the region dealing in the manner in which they usually deal. We are unable to agree that it should have been abundantly obvious to the first appellants that the KBT agreement was a sham transaction. The business of the respondents was the manufacture of paper products from imported paper. Papan testified that KBT had supplied paper to the respondents in the past, and KBT`s ability to supply medium grade paper to the respondents was admitted by the liquidator Don Ho. The president-director of PAU, Lazarus Perdana, testified that, in his view, Papan could easily have used PAU as the vehicle through which paper was supplied from KBT to the respondents if he wished to. In the past, PAU had also been used by the respondents as a purchasing agent: in 1984-85, PAU had purchased wood-free printing paper from PM Leces. Kestemont stated that he viewed PAU as the export and import arm of the respondents. These facts were actually accepted by the learned judicial commissioner. In her judgment she stated: `KBT was a paper and pulp manufacturer which supplied medium boards to the company while PAU imported and exported general merchandise, in particular garments and spare parts`. The purchase of paper from KBT through PAU was, therefore, a fairly normal business transaction. Even if the loan was structured by Kestemont, as counsel for the respondents was quick to remind us, this was irrelevant as the structure proposed was within the sphere of the directors` authority.

32 We note, too, that the deal was not concluded with KBT left completely in the dark. By Papan`s own testimony, Chan Yoo Tuck, who was KBT`s financial consultant, was present at every meeting with the first appellants and served also as an interpreter for Papan, whose principal language was Chinese. As Chan was in fact the group`s financial advisor, Kestemont had previously sent correspondence to him regarding the PAU loan. At the Jakarta meeting in March 1985, two others, Bachtiar and Eka, were also present. Bachtiar was Papan`s assistant and the finance director of KBT; Eka was the director for planning and budget, either of the group or of KBT.

33 In addition, the evidence adduced at trial on the issue of notice was in our opinion far from satisfactory. Although Papan testified that Kestemont and Seah actually knew that the KBT transaction was a sham transaction, he appeared from the notes of evidence to be a completely untrustworthy character, prone to hiding behind a cloak of forgetfulness and ignorance whenever it suited him. He feigned ignorance of loans outstanding between KBT and PAU. Inspite of his position as managing director, he stated that he did not know the details of the loan agreement with the first appellants - such things were left to Ong. He had not heard anything about a query made by the first appellants over the respondents` non-payment of property tax on the factory premises, as again such matters were left to Ong. He remembered that he wrote a letter to the first appellants informing them that PAU`s debt would be borne by PAU, but he had to go back to Jakarta to look for a copy of it, and, somewhat conveniently, he omitted to send his lawyers a copy either. The knowledgeable Ong was not called. The other negotiators present at the Jakarta meeting (Chan Yoo Tuck, Tjandra Bachtiar and Eka) were not called. The directors who were called (Oei Siong Sin, Ronald Tjakradisurya, Lazarus Perdana, Ho Kiat Lim) were not involved in the transaction. Ho, who signed the debenture, stated that he did not meet the first appellants` representatives at any time. As the first appellants also failed to call Seah, the evidence on actual notice became a question of Papan`s word against Kestemont`s. The learned judicial commissioner made no finding of fact as to whether she thought either was a trustworthy witness.

34 The correspondence, similarly, does not indicate that the first appellants had knowledge that the KBT agreement was a sham. Counsel for the respondents stressed certain aspects of a visit report dated 18 March 1985 written by Kestemont after the meeting with Papan in Jakarta in which Kestemont stated that Papan would `swap the debt` with PAU. We observe, however, that Kestemont also stated that KBT would `deliver for US$1m` paper to the respondents through PAU. Counsel for the respondents emphasized most strenuously the word `deliver`. We are unable to agree, however, that this word, in its context, is deserving of such sinister overtones. Predictably, the first appellants` prime concern was to get rid of the PAU debt, and the advantages of the deal are clearly listed in the same report: the respondents were asset-rich, Singapore allowed quick legal action if necessary, and DBS was a reliable first-creditor. It merits repeating, nonetheless, that the transaction, as proposed, was proper. If the respondents had merely been `assuming liability` for PAU`s debt, then the transaction would have been `highly unusual` whether or not PAU was Indonesian. On the other hand, if the delivery from KBT had indeed taken place there would have been no cause for query and all concerned would have come away with the perfect deal. Probably the most worrying detail was that the KBT agreement, sent to the first appellants on 10 April 1985, was not signed on behalf of KBT, only on behalf of the respondents. Ironically, if at the time the first appellants had demanded that it be signed on behalf of KBT, Papan would probably have done so immediately, or indeed any of the other KBT negotiators, like Chan Yoo Tuck. To the first appellants, this was just an internal arrangement between the companies, something not of their concern.

35 In our view, and with respect, the learned judicial commissioner took certain irrelevant considerations into account while making her decision. She was of the view that Seah should have been called as a witness to explain in detail what occurred at the meeting with Papan on 22 May 1985. This meeting had arisen because, on 20 May 1985, the first appellants had telexed the respondents to inform them that the part of the loan in the form of a discounting facility was only allowed to fluctuate up to S$0.5m. On 21 May 1985, the respondents` solicitors telexed the first appellants` solicitors to inform them that the respondents no longer required the facility, but apparently Papan had changed his mind after the meeting with Seah on 22 May 1985. We are of the view that this slight hiccup in the relations between the parties is of no relevance to the status of the debenture. The first appellants` offer was accepted by the respondents on 1 April 1985. On 10 April 1985, the respondents issued the first appellants debit and credit instructions. On 23 April 1985, the debenture was executed, and on 24 April 1985, the debit and credit instructions of the respondents were carried out. This incident in May occurred much later. In any event, Papan had, at trial, testified as to the cause: the respondents were displeased with the S$0.5m limit as they had expected a discount facility of US$1m. Compromise was achieved when the limit was raised to S$1m, and this concession on the part of the first appellants was evidenced by a telex to the respondents of 21 May 1985.

36 The learned judicial commissioner also drew certain unsatisfactory inferences from Kestemont`s behaviour. In particular, she pointed out that in a report to the Brussels office dated 2 May 1985 Kestemont wrote `The facilities have been given to the company ... to repay the bulk of our unsecured debt to PAU`. On a perusal of the document, we found that the next line read `These moneys were to be considered as advance payment of future deliveries of raw materials by Kertas Berkasi and for other commodities sold by the Indonesian group to Puvaria`. She opined that Kestemont had been less than forthright in a meeting with the liquidator of the respondents, where he had stated `no, we don`t want to be involved in commercial contracts that go between the company that we grant facilities and the other party`. In our view, this was not a damaging statement. Kestemont merely meant that the first appellants assumed the respondents would make their own internal arrangements to fulfil the agreement. In any event, we think it too optimistic to expect Kestemont to be forthright with the liquidator where the liquidators` interest in the matter was plainly diametrically opposed to the first appellants`. Lastly, the learned judicial commissioner was of the view that the first appellants ought to have known that the swap arrangement was unlikely to be in the interests of the minority shareholders of the respondents. With respect, this consideration is unimportant as it has no bearing on the question of the directors` authority to bind the respondents.

37 In the circumstances, we are of the considered opinion that the learned judicial commissioner erred in her finding that the circumstances put the appellants on inquiry. It follows then that the first appellants, not being privy to the lack of authority on the part of the directors, are not affected by it and the debenture is not void as against them. The second and third appellants were therefore correctly appointed as receivers and managers under the debenture and the money paid over by them under their appointment was, accordingly, proper. Consistently with this, the first appellants are not constructive trustees for any of the sums received by them under the loan agreement.

38 Accordingly, we allow the appeal and set aside the judgment of 3 August 1993. The appellants shall also have the costs of these proceedings here and below to be taxed and paid by the respondents. There will be the usual consequential order that the deposit in court as security be refunded to the appellants or their solicitors.

39 Appeal allowed.